The threshold effects of household indebtedness on multidimensional poverty

Purpose – The purpose of this paper is to assess the existence of critical tipping points for explanatory variables (age, government grants, education and household size) – in particular, household debt service-to-income on multidimensional poverty. Design/methodology/approach – The paper applies a generalized additive model (GAM) using regression splines on National Income Dynamics Study data to establish threshold effects of the explanatory variables on multidimensional poverty. Findings – The results show that the tipping point at which debt is associated with improved household welfare is 42.5 percent (level of debt service-to-income). With significant findings, household heads younger than 60 years of age and more children are associated with lower multidimensional poverty. Government grants may suffer from fungibility as they do not seem to be an effective tool for multidimensional poverty eradication. The ideal household size with negative significant correlation to multidimensional poverty is less than four members. And lastly, education proves to be the best instrument for households to escape multidimensional poverty. Social implications – High household indebtedness is a severe social problem. Its effects include deteriorating physical and mental health, relationship difficulties and breakdown. Significant social costs arise such as medical treatment and indirectly, reduction of productivity. Further effects on society include rising criminal behavior, children dropping out of school thereby transferring poverty to succeeding generations. Non-performing loans increase and in turn lead to reduced credit availability. The overall health of the economy is impacted due to reduced aggregate demand. Originality/value – Macro studies have demonstrated the presence of thresholds on debt analyses. However, such is not known in micro analyses, this paper attempts to bridge this knowledge gap by applying GAM for analysis of debt-poverty nexus at the micro level.